An ‘anti-awakening’ reaction? Fund giant Vanguard is leaving the net zero climate alliance

Vanguard, the world’s second-largest mutual and exchange-traded fund manager, is pulling out of a major financial sector alliance aimed at helping fight climate change, the firm announced Wednesday.

Vanguard said in a statement that it would monitor its progress regardless of the alliance in an effort to provide “clarity” to its investors.

Some environmental groups hailed the exit as a major blow to efforts to keep promises of zero greenhouse emissions from the lifeblood of the economy – the financial services and banking sectors. These groups argued that such a move would lead to “anti-awakening” sentiment, which claims that investments in the expected clean energy transition and other climate-related actions are only achieved through investment returns.

The alliance, called Net Zero Asset Managers (NZAM), was launched at the end of 2020 to encourage asset managers to reach the goal of net zero emissions by 2050 and help limit global temperature rise to 1.5 degrees Celsius. This is the voluntary temperature goal agreed at the key Paris climate meetings in 2015 and is seen as key to slowing atmospheric warming, calming acidifying oceans, halting coastal erosion, limiting severe droughts and other deadly and costly environmental changes.

Moreover, proponents of the NZAM pact argue that members should be more transparent and align goals within their peer group.

Read: Here’s where big US banks rise and fall on climate change

“We have decided to withdraw from NZAM so that we can provide the clarity our investors want about the role of index funds and how we think about material risks, including climate-related risks,” Vanguard said in a statement on its website.

“Such industry initiatives can foster constructive dialogue, but can sometimes result in confusion about the views of individual investment firms. This has been particularly the case with the introduction of net zero approaches to broadly diversified index funds favored by many Vanguard investors,” the statement said.

Related: Biodiversity Rising on the ESG Agenda. How to Invest.

The Biden administration, like most major industrial economies, has sought to move the US economy as a whole to net zero emissions by 2050. Net zero coal, oil CL00,
and natural gas NG00,
but also by offsetting greenhouse gas emissions by planting carbon-absorbing trees or sequestering and storing carbon at the point of combustion.

“This change in NZAM membership status will not affect our commitment to helping our investors manage the risks that climate change may pose to their long-term returns,” Vanguard said, adding that it will continue to provide investors with the information and products seen pushing the U.S. towards net zero emissions in the coming decades.

Together with BlackRock BLK,
and State Street STT,
With approximately $8.1 trillion under management, Vanguard is considered one of the Big Three index fund managers that dominate most American retail investments and retirement planning.

“Vanguard has long outpaced even its industry peers in mitigating climate risks, but at least it claims it’s moving in the right direction,” said Casey Harrell, chief strategist at climate policy group Vanguard SOS.

“With the decision to walk away from NZAM now, the firm is giving up any excuses,” Harrell said. “Instead of serving the interests of its clients, Vanguard bows to right-wing political pressure. It is now clear that investors concerned about climate risk should take their investments elsewhere.”

Lara Cuvelier, a sustainable investment campaigner with law firm Reclaim Finance, said she believed Vanguard’s involvement in NZAM to date was more of an advertisement and less of a pragmatic move.

“The initiative will no longer be held back by the inaction of such a major player and can move forward to push its members to go net zero and stop leading us into climate chaos,” he said.

BlackRock has also made headlines in recent days after it said it moved $2 billion in Florida taxpayer assets from accounts with a fund manager. Florida’s Republican chief financial officer said large asset managers should focus on delivering returns rather than promoting environmental, social and governance (ESG) principles.

“Everything we do as a fiduciary is designed to generate income for our clients,” BlackRock said in its response. “Given BlackRock’s strong returns to Florida taxpayers over the past five years, we are surprised by the Florida CFO’s decision. “Neither the CFO nor his staff have raised any concerns about performance.”

BlackRock joined the NZAM initiative as a signatory in March 2021.

Vanguard’s exit from the pact also comes weeks after the U.S. Department of Labor’s decision to expressly allow pension plan managers to consider climate change and other ESG features when selecting investments or meeting shareholder requirements. And the rules clear the way for more 401(k) employment retirement plans to offer ESG and so-called sustainable funds.

The rule, first proposed in October 2021, essentially repeals two actions to limit ESG reviews introduced during the Trump administration.

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